After rallying for most of February to reach record highs in the month, the s&p

Question

After rallying for most of February to reach record highs in the month, the s&p 500 stock index fell sharply on Friday march 6 following news that the economy added 295,000 jobs, bringing the unemployment rate down to 5.5%. Analysts been expecting job growth closer to 235,000.

a) Why would you typically expect faster than expected employment growth to raise the market price of stocks? Explain your answer in a few sentences.

b) Why do you think the stocks fell over 1% on the news instead? Explain in a few sentences.

Explanation / Answer

a) Faster than expected employment growth indicate that ecomony is going to pick up and threfore company's profit will increase and accordingly price rises.

It also indicate that people will have more income and therefore more buyer will come and invest in the stock market and tehrefore stock prices goes on rise.

b) Becasue market may think that extra hiring may not be supported by economy growth and therefore it will reduce the profits of the company and therefore stock price falls.

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